Experienced investor claimed investments were not disclosed properly and unsuitable

On the suggestion of his advisor, Mr. V had purchased special “synthetic" preferred shares of a complex structured investment product offering a principal guarantee at maturity. Its returns depended on the number of future credit defaults, or in other words, the level of net losses within the underlying portfolio. Shortly after purchasing the shares, an unexpected rise in credit defaults seriously impaired the viability of the product. Shareholders voted for early redemption, even with the knowledge that only a fraction of their investment could be recovered.

Mr. V complained to his investment firm that the product was way above his risk tolerance and not consistent with his stated investment objectives. He believed the product was promoted in a way that implied additional safety given the investment firm's involvement. Mr. V wanted compensation of $17,000 for the capital loss he incurred on the shares.

The investment firm declined. It responded that the investment was appropriate given Mr. V's financial knowledge, medium risk tolerance, and long-term investment objectives. Mr. V then brought his complaint to OBSI.

Complaint not upheld

We investigated two issues: whether the investment was suitable for Mr. V, and whether the firm had provided adequate disclosure about the risks.

We found that Mr. V was indeed an experienced investor with above-average investment knowledge. He was experienced with dividend-paying equity investments and he wanted his equity investments to provide both income and the potential for growth with a measure of protection for his capital. The synthetic shares matched his goals and, at the time he purchased them, were rated high quality. Although the synthetic preferred shares were not a traditional equity investment, we determined they were suitable and in keeping with Mr. V's objectives and risk tolerance.

On the issue of disclosure, Mr. V told us he had discussed the investment with his advisor. The advisor told us he had explained the risks of the investment and had provided Mr. V with a prospectus. Mr. V also told us it was customary for him to at least scan through a prospectus before investing.

We reviewed the prospectus and determined that with even a cursory read at the time of purchase Mr. V. would have known he could suffer a partial or total loss of his funds. We also found no evidence to suggest the investment firm provided additional assurances on the product.

We determined that Mr. V was recommended an appropriate investment product and was provided sufficient disclosure. As a result, we did not recommend compensation.

(2010)